Abstract

Nowadays many agents living in industrialised countries
spend an increasing share of their income to defend against
environmental deterioration. As many authors have pointed
out, these environmental defensive expenditures may contribute to raise production and thus also the overall Gross Domestic Product of a country.
This work and the corresponding strand of research
moves one step forward with respect to the existing literature, showing that defensive expenditures can generate not only a higher production level, but also a self-feeding growth process. Environmental degradation, in fact, may induce agents to work harder to replace depleted environmental goods with expensive substitute goods. The consequent rise in the activity level may further deplete the environment, worsening the agents' expectations on the future environmental quality and increasing their demand for substitute goods.
To examine this substitution mechanism between environmental
and private goods, we adopt a simple model with a
continuum of identical agents that live for two periods
(today and tomorrow) and formulate expectations on the
future state of the environment. Differently from previous
contributions in this line of research, we assume a more general setting where agents' expectations on the future environment can be right or wrong and examine how such expectations influence capital accumulation and growth.